Leading global consultancy and accounting firm, KPGM, has published a new report that highlights the establishment of cryptoassets as an asset class for institutional investors but also shines a light on the challenges that the institutionalization of cryptoassets is facing.
Cryptoassets Are Here to Stay
The report is titled ‘Institutionalization of cryptoassets: Cryptoassets have arrived. Are you ready for institutionalization?’ and was composed by KPMG with participation by Coinbase, Fundstrat Global Advisors, and Morgan Creek Digital.
KPMG is convinced that cryptoassets, which it refers to as simply “crypto” in the report, are here to stay. The digital asset class’s surge in market capitalization from a few billion dollars to an all-time high of over $700 billion shows that crypto needs to be recognized by the financial industry as a viable asset class.
Not only has bitcoin, the world’s leading cryptoasset, established itself as an alternative currency for online purchases and remittances, it has also become an investable asset that has attracted a range of institutional investors. Today, private banks in Switzerland, asset managers in the US, and hedge funds in the UK are offering its clients the opportunity to receive exposure to BTC.
The evolution of crypto economics has created several additional use cases for cryptoassets. The report cites fundraising through ICOs on Ethereum, low-cost money transfers using digital currencies like Litecoin, and the tokenization of assets as three of the most powerful use cases for crypto.
Moreover, the report recognizes that crypto’s existing volatility is a growing pain that is to be expected from a budding new asset class and should not deter institutions from adopting this new technology.
“Volatility is widely quoted as a significant limitation for the use of crypto for any use case. While volatility is certainly a problem, it is important to recognize that these assets are still fairly immature and will become less volatile as they mature. There are also significant efforts that are underway across the industry for the creation of what are called stablecoins to address the volatility problem,” the report states.
Key Challenges for Crypto Institutionalization
While KPMG is convinced that cryptoassets will become an integral part of the financial industry of tomorrow, its report clearly highlights that there are still a number of hurdles that will need to be overcome before blockchain-based digital assets will become financial products for all investors.
KPMG highlights six main issues, namely regulatory compliance, fork management and governance, KYC and cryptoasset governance, security cryptoassets, accounting and financial reporting, and tax implications.
Cryptoassets will require to adhere to existing regulations as well as to new regulations and laws that will be written into legislation as the asset class evolves. This will be one of the most important aspects of crypto institutionalization as the majority of financial institutions will stay away from digital currencies and tokens if they are not compliant with financial regulations.
How crypto businesses will manage forks going forward is another important issue that will need to be addressed. Forks, such as the latest bitcoin cash fork, can be highly disruptive to crypto businesses. For cryptoassets to gain institutional acceptance, an industry standard needs to be set that crypto business can follow to ensure continuity of operations even in times of a hard fork.
While the idea of an industry-wide KYC framework for cryptoassets goes against everything that cypherpunks and the majority of the active bitcoin community stand for, KPMG argues that for cryptoassets to become institutionalized, a KYC process that identifies holders will need to be put into place to comply with KYC/AML laws.
Safely securing cryptoassets is another challenge that the industry faces as digital assets are prime targets for cybercriminals and with the growing cybercrime market, this will unlikely change anytime soon. Hence, cryptoasset cybersecurity protocols and secure custodianship for institutional investors will be required for crypto to flourish in the established financial industry.
Account and financial reporting standards will also need to be developed for cryptoassets to take off in the financial sector as there are currently only limited crypto accounting options available and these are mainly targeted at retail investors.
Finally, crypto will require its own taxation laws. Currently, crypto is somewhat covered by income and capital gains tax but laws differ from country to country and some investors may find themselves in a grey area as existing tax legislation is not clear enough on the matter. This will need to be addressed by lawmakers for crypto to flourish among institutions.
Pay Attention to Crypto
“Cryptoassets are worth paying attention to as they have the potential to revolutionize the global financial ecosystem. Reducing friction has been a key element of the history of financial innovation. There is friction in the global economy, and that friction led to the invention of cryptoassets. That very friction will also define the staying power of cryptoassets as we look forward,” the report’s authors state and, thereby, reiterate the company’s view that cryptoassets are here to stay.
Moreover, KPMG believes that the “crypto revolution” will not just bring new types of investable assets but will likely also bring new business models and investors that have the potential to disrupt the status quo of the financial industry.
“A new world of finance is emerging in which transacting in cryptoassets may become
standard procedure. New tokens and assets are one thing, but new business models
and market participants may redefine the space significantly over the next few years.”